Portfolio management is a process encompassing many activities of investment in assets and securities. It is a dynamic and flexible concept and involves regular and systematic analysis, judgment and action. The objective of this service is to help the unknown and investors with the expertise of professionals in investment portfolio management. It involves construction of a portfolio based upon the investor’s objectives, constraints, preferences for risk and returns and tax liability. The portfolio is reviewed and adjusted from time to time in tune with the market conditions. The evaluation of portfolio is to be done in terms of targets set for risk and returns. The changes in the portfolio are to be effected to meet the changing condition. Portfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. Portfolio theory concerns itself with the principles governing such allocation. The modern view of investment is oriented more go towards the assembly of proper combination of individual securities to form investment portfolio. A combination of securities held together will give a beneficial result if they grouped in a manner to secure higher returns after taking into consideration the risk elements. The modern theory is the view that by diversification risk can be reduced. Diversification can be made by the investor either by having a large number of shares of companies in different regions, in different industries or those producing different types of product lines. Modern theory believes in the perspective of combination of securities under constraints of risk and returns.
Types of Portfolio Investments
When it comes to investing there are many options available to individuals. A person can invest in stocks, bonds, mutual funds, etc. Once a person invests in multiple products their performance needs to be tracked and strategies made to ensure the investor reaps the most profit possible. This is where the investment portfolio comes into play. According to Investor Awareness, it is a term that describes all investments owned. To take this definition a little farther, an investment portfolio is a significant aspect in diversification. Maintaining a diverse portfolio helps to mitigate loss because the investor has not placed all of their eggs in one basket. There are different types of investment portfolios. Perhaps the most common type’s individuals are exposed to are: Conservative, Balanced and Aggressive Growth.
A portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor’s goals. Items that are considered a part of Investors portfolio can include any asset that they own – from real items such as art and real estate, to equities, fixed-income instruments and their cash and equivalents. For the purpose of this section, Investors will focus on the most liquid asset types: equities, fixed-income securities and cash and equivalents. The asset mix they choose according to their aims and strategy will determine the risk and expected return of their portfolio.
1. Aggressive Investment Portfolio
In general, aggressive investment strategies – those that shoot for the highest possible return – are most appropriate for investors who, for the sake of this potential high return, have a high risk tolerance and a longer time horizon. Aggressive portfolios generally have a higher investment in equities. Aggressive investment portfolios are for investors not afraid of high risk. This type of portfolio may incorporate mutual funds that aim for high capital gain, equities, stocks, bonds, cash and maybe some commodities. In the short-term, growth will be very small and some loss will be observed. As a result, aggressive portfolios perform better in the long term – about five years or longer. An actively traded aggressive portfolio will typically gain maximum returns for the investor. The loss factor is why only individuals who are willing to take a high financial risk should seek an aggressive investment portfolio.
An aggressive portfolio contains high growth investments that will hopefully appreciate in value. This strategy attempts to achieve high long-term growth by investing in often risky but profitable, short-term stocks. Under normal market conditions, the Aggressive Growth Portfolio will invest approximately 100% of its total assets in equity securities. The Aggressive Growth Portfolio can invest up to 100% of its total assets in equity securities and up to 25% of its total assets in fixed income securities.
2. Balanced or Moderate Investment Portfolio
A moderately aggressive portfolio is meant for individuals with a longer time horizon and an average risk tolerance. Investors who find these types of portfolios attractive are seeking to balance the amount of risk and return contained within the fund. The portfolio would consist of approximately 50-55% equities, 35-40% bonds, 5-10% cash and equivalents.
The Moderate Portfolio’s primary investment objective is to seek long-term capital appreciation and also the Moderate Portfolio seeks current income.
3. Conservative Investment Portfolio
The conservative investment strategies, which put safety at a high priority, are most appropriate for investors who are risk averse and have a shorter time horizon. Conservative portfolios will generally consist mainly of cash and cash equivalents, or high-quality fixed-income instruments. The main goal of a conservative portfolio strategy is to maintain the real value of the portfolio, or to protect the value of the portfolio against inflation. The portfolio shown below would yield a high amount of current income from the bonds and would also yield long-term capital growth potential from the investment in high quality equities.
The conservative investment portfolio is geared towards preserving capital. A minimal risk investment strategy is used. This type of portfolio is ideal for retirees who are focused more on having assets available than a stream of income from interest. Since the primary goal is to preserve capital, investors can dip into their principal to supplement living expenses instead of relying on the portfolio’s earned income. The Conservative Portfolio’s primary investment objective is to seek preservation of capital and current income. The Conservative Portfolio also seeks capital appreciation. Under normal market conditions, the Conservative Portfolio will invest approximately 65% of its total assets in fixed income securities and cash and approximately 35% of its total assets in equity securities. The Conservative Portfolio can invest up to 100% of its total assets in fixed income securities and or some time up to 20% of its total assets in equity securities.
Investors can further break down the above asset classes into subclasses, which also have different risks and potential returns. For example, an investor might divide the equity portion between large companies, small companies and international firms. The bond portion might be allocated between those that are short-term and long-term, government versus corporate debt, and so forth. More advanced investors might also have some of the alternative assets such as options and futures in the mix. As, the number of possible asset allocations is practically unlimited.